Chapter 13 - Fiscal Policy and Its Impact on the Economy

Social Insurance Programs

Are government programs intended to protect families against economic hardship

Fiscal Policy

Is the use of taxes government transfer or government purchases of goods and services to shift the aggregate demand curve. The way a government adjust its spending levels and tax rates to monitor and influence a nation's economy

Investment Tax Credit

Tax break given to firms based on their investment spending ( increased incentive for investment spending)

Expansionary Fiscal Policy

Increases aggregate demand (when in a deep recessionary gap the gov can increase government spending and cut taxes -> creates jobs and income so they can increase consumer spending.) 

• Can make a budget surplus smaller or a budget deficit bigger. 

Contractionary fiscal policy

reduces aggregate demand. When the economy has an inflationary gap the government can cut spending or raise taxes. -> higher taxes and less government jobs leave consumers with less money to spend helping to cool off the economy to reduce inflation. 

• Can increase the budget balance for that year, making  budget surplus bigger or a budget deficit smaller. 

Expansionary fiscal policy can…

close a recessionary gap

Contractionary Fiscal Policy can…

eliminate an Inflationary gap

Recessionary Gap

a situation in which the real gdp is lower than the potential gdp at the full employment level.

Inflationary gap

the amount by which the act gross domestic product exceeds potential full-employment GDP

Fiscal Policy has

a multiplier effect on the economy

Multiplier effect

Is an economic phenomenon where an initial injection of spending or investment leads to a proportionally larger increase in overall national income

When the economy is booming, the multiplier is…

closer to 1x

When the economy is in recession, the multiplier is…

closer to 2x

Lump-Sum Taxes

are taxes that don’t depend on the taxpayer’s income

Automatic Stabilizers

built-in fiscal tools designed to mitigate economic fluctuations by adjusting certain government revenue and expenditure levels in response to changes in the economy

Discretionary Fiscal Policy

deliberate government actions that adjust tax rates or government spending to influence economic activity, manage aggregate demand, and promote stable growth. It requires active legislation and policymakers' judgment, distinguishing it from automatic stabilizers that naturally adjust as the economic cycle fluctuates.

Other things equal, discretionary expansionary fiscal policies…

reduce the budget balance for that year.

Discretionary expansionary fiscal policies…

increased government purchases of goods and services, higher government transfers, and/or lower taxes.